What is the real interest rate today? 101

Yikes. Some say US real rates are low and falling. Some say they are negative others say they are at Covid highs. How can smart people have such different opinions.

It comes down to three basic questions that are a matter of faith. Real yields are supposed to be the yield you get from investing in nominal bonds minus the inflation you experience while holding them which reduces your real purchasing power.

So here are the "religious" issues.

1. What inflation matters and what is the best measure of

The Internet boom and bust - a story part 3. Like all things there are similarities to today and differences.

My own experience during 1995-2002 year by year with highlights.

In this Part I will finish up with the 1998 panic easing and then get into specific 1999-2000 stuff As mentioned in Part 2 and the added thread on the Asian debt crisis of 1997 the after effect of that unwind had a major impact on markets and policymakers thought 1998.

But at a personal level things were absolutely nuts. I survived my own losses due to the crisis

The Internet boom and bust - a story part 2. Like all things there are similarities to today and differences.

My own experience during 1995-2002 year by year with highlights.

In this part I'll start building up both the tech highlights but focus more on the markets This time periods was also highly tumultuous for Salomon brothers, financial market participants, policymaker actions, and geopolitics. Like today central bankers, made many mistakes and bailed out various players, and world changing geopolitical developments occurred. Unlike

The Internet boom and bust - a story part 1. Like all things there are similarities to today and differences.

My own experience during 1995-2002 year by year with highlights.

Before I jump in I was NOT an investor during this time. I worked on the sell side. As a sell side employee I had significant trading restrictions that prevented me from speculating and mostly even for "trading" my own account and like today I am pretty risk adverse so I favor passive investing.

That said I had a pretty unique seat that offered me a great

The impact of completely correcting the UST duration holdings of the Fed 101🧵

Despite the warnings and hyperventilation of the usual suspects, correcting the Fed's balance sheet is just not that big a deal.

Today the balance sheet has a monetary policy impact which I have Written about extensively. The impact is that the Fed owns a larger proportion of long dated treasuries in its portfolio than the portfolio of all Treasury's issued and outstanding. In other words the Fed "protects" the private sector from taking on duration risk.

Foreign stock investing 101

Us naive Americans dont think about currency returns as part of our portfolios as we have the biggest and for decades best place to invest in equities.

Every other global investor cares about currency returns at basic level for their investing The basic idea for investors or all nationalities should be simple and obvious to all. But we Americans just haven't had to care. Maybe we still don't but at least we should be aware. This 101 will explain what is obvious to all non Americans and then show how it works

Money creation and credit creation in the private sector 101 part 2.

Role of Repo.

In the prior thread I outline credit creation which can happen without banks and money creation which requires banks.

I also hinted at bank reserves role as being one of grease to the system and NOT necessary for bank money creation but necessary for interbank deposit shifts. I also didn't discuss base money creation from the Fed and won't be dealing with that in this thread either.

Here I will discuss the specific role of Repo in today's financial system

Money creation and credit creation in the private sector 101

There has been a lot of focus on the repo market lately. I get it. It's an important part of the capital markets in the credit creation process. But its growth and contraction is part of the credit creation process The repo market where transactions are between hedge funds and money market investors, and those who desire leverage for whatever purpose is an important market in the credit creation process BUT is not part of the money creation process UNLESS a commercial bank or the Fed is

I've been studying various versions of balance sheet expansions over my career. I'd classify them as

Japanese first failed effort
UK's version
U.S. Version 1
U.S. version 2
ECB version
Japanese all in version 2

They are all fairly different in approach. The big takeaway 🧵 The developing Fed version that most are excited about is most akin to the Japanese first failed effort.

Here's a rough summary of each

In 2001-2006 Japan the BOJ initiated QE. In their version they offered significant lending to the Japanese banking system for good collateral

Why do repo rates change and what do they have to do with reserves. This is a super technical issue and there are better folks to follow on this topic than me but I'll give it a go.

Firstly what are the two sides of a repo transaction and why do they want to interact. One side is a guy with a bank deposit he wants to earn interest on. The other is a guy who wants to borrow money overnight and has assets he owns that he is willing to provide as collateral to the loan. We can go down a level on each side but for now let's keep it simple.

Some thoughts on 10 year notes since Powell guided for a restart of the cutting cycle at Jackson Hole. Trying to answer what the bond market is saying

Nominal yields have fallen 33bp Note yields are driven lower by
1)Falling real GDP expectations
2)Falling Inflation expectations
3) Falling "risk" of owning assets
4) Improving supply/demand balance vs expectations.

In attributing nominal yield changes to these 4 things unfortunately market prices don't

I YR return Asset bull cases part 1

SPX

SPX has a trailing earnings yield of 4% with expected 1 year earnings growth of 11.7%. What's the bull case? For me the bull case is a combination of simply collecting the earnings accrual and having the multiple expand slightly. In that case a 16% return would occur which is roughly 1 std higher and happens 1 out of 6 timer.

The big driver of equity returns is the accrual of earnings. Over the last 5 years earnings accrual has dominated historic returns

I YR return Asset bull cases part 1a
10 Year notes

10 year notes yield 4% today. What's the bull case? Let's talk about an unusually good absolute return that would happen 1 in 6 times this year meaning 1STD or more. That would be a 6% price rise Along with a 6% price move One would also get a 4% coupon generating a 10% return and an excess return over cash of 6.5%. That's pretty good and could be leveraged 2.5x to have the same risk as SPX and generate 16.25% return.

What would that mean mechanically?

Solvency/Liquidity/bank reserves 101

I see we are all focused on $kre again.

Let's review how banks get in trouble.

By far the most important one is they become insolvent An insolvent company has negative equity. Its assets are worth less than its debt. For a bank the largest debtor is the depositor but other debtors exist as well.

Banks risk insolvency due to higher leverage of their equity relative to any other non financial company

This chart Should not be new to anyone that has my work since 2022. @SteveMiran used and credited my work to write his paper on ATI which probably helped him get the Fed Governor Gig😅.I have presented my work to many Fed staffers and senior treasury officials many times. BUT 🧵

https://twitter.com/lukegromen/status/1978250481941037223

The Fed bears only partial responsibility to the muting of QT. QT impact is two fold reducing reserves HAS occurred. Though not much and mostly just reduced pseudo reserves in the form or RRP reduction to zero.

BUT by far the biggest impact of QT is the forcing of the private

Assets vs cash NOT one asset vs another. 101

I raised cash yesterday by selling 20% of my liquid net worth of assets holdings. I sold gold, long term bonds and stocks without view on one asset vs another. Just raised cash while keeping my asset allocation roughly constant. I now hold 50% of my AUM in cash. Why would I do that. What makes me want less of an asset portfolio I'll refer to now as Beta and more cash.

Well my decision hinges on various factors and all are based on expectations

COT Vs TFF.

There is a chart going around using the COT data which suggest non commercial (speculators) are historically short equity futures. Firstly yep they (whomever "they are") are short and medium large but not historic

BUT Far more importantly the Non commerical is a terrible kluge of data including leverage longs and shorts and real investors. We never ever use COT data for equities because TFF is available and purpose built. Those who use COT are dinosaurs. TFF is moderately more useful because the cohorts are more sensible.

AIN is Unlevered long only asset managers. They are pretty long.but not as long as theyve been and I could accept the idea that they need to buy to keep up. BUt they are pretty long just not all time long

Lightning network as a way for $MSTR to earn on its BTC holdings 101

I am a sucker. As you may know I have been obsessed with how MSTR or any other BTC treasury company can earn money on its holdings in excess of appreciation.

People including my friend @LynAldenContact Whisper words that my old brain gives unmediated validity to because I'm a newbie dumb fuck on the topic. The Lightning network was one of those whispers.

My friend Claude and I did some work

Fed Bills purchases to add reserves 101

As mentioned in a bunch of my writings Reserves are abundant today. Without changing QT on treasuries of 5BN and QT on mortgages which runs at roughly 20BN reserves will not be scarce for at least a year or more

BUT...🧵 Someday in the future reserves will be ample and have potential to become scarce.

Firstly let's deal with do reserves matter at all. In my DSR from last winter

Global Wealth vs medium of exchange 101 - just some thoughts

I've been thinking a lot about my understanding of the value and amount of currencies and their link to global wealth. I am sure there is great research on this topic and would be grateful for sources. Nonetheless I suspect people are really confused about owning stuff (wealth) and mediums of exchange. I am, hence this writing.

In a world without currencies or any other medium of exchange wealth would still exist. Wealth isn't denominated in a currency. It's what assets you own.

MMT vs Old School impact of interest rates 101

These are my thoughts which could be completely wrong and have been formed by a fair amount but not exhaustive readings on MMT. Try to read this as a work in progress and a middle ground between two extreme views. The question at hand is whether increasing interest rates is restrictive on or stimulative to economic activity.

Here's where you are going to get angry. My answer is "it depends"

Let's posit two worlds

1. A world with only private and no government debt

2. A world with